25 May 2017
Week In Brief: BUSINESS AND THE CITY
ROOM TO LET: 50 CENTS: The theme of the year when it comes to housing is homes to rent. The rising affordability of owning homes is putting ownership out of the question for the young, but renting is filling the gap for many. The liberalisation of the housing rental market in the late 1980’s has created a thriving rental sector, albeit with rapid rises in rents in some areas. However, although private landlords have been quick to improve their letting standards and become “tenant friendly”, the larger property investors have been surprisingly slow to move in – often citing the lack of an established market to enable them to price transactions and to be sure of selling stock on at reliable yields. The true reason is probably the fear of a return to regulation in the sector, the difficulties of managing a let portfolio of residential units, and, linked to that, the lack of modern stock built for the rental market, which typically has subtly different needs to stock built for sale – no gardens, smaller rooms, and easy to clean and service. Now, in spite of occasional mutterings over the need for rent controls, the market seems to have broad political acceptance and is understand by tenants who welcome the safeguards and flexibility of modern contracts – if not always the upward movement of market rents.
One property company which has long specialised in the private rented sector is Grainger plc (formerly Grainger Trust) which has been in the business since the C19th when it originated in Newcastle on Tyne to take on the large residential holding of the Liddell Grainger family, ground land lords of much of central Newcastle. Most of Grainger’s stock is outside central London – though widely spread around the UK – and it also has a substantial rental business in Germany, where renting a home is considered normal – around two thirds of Germans live in rented houses, increasingly owned by private investors. Grainger announced its most recent six months trading results last week, and they make good reading for shareholders – and for other investors looking at entering the sector. Gross rents were up 3.5%, whilst net rents were up 11%, reflecting an increasing predominance of new residential blocks in the portfolio, much easier to manage and with lower maintenance costs. That pushed half year profits up to £41m, an increase of 12 % on the previous comparable half. And the Chief Executive, Helen Gordon, says there is more to come as the weighting of new purpose built stock in the portfolio increases, with more under construction due to be available for occupation in 2019 and 2020. The company has spent over £400m in the last couple of years on new buildings, and expects to more than double that over the next two years.
But the one grey cloud to all this is that the sector is doing so well that it has finally attracted the attention of new investors, who are joining existing players such as Grainger to participate in what the UK property market now sees as a new asset class – and unlike offices and retail, with lower risks and further steady growth prospects. That is driving up land prices for new residential blocks of apartments, and also the value of suitable existing blocks. That means the development of new financial and ownership structures – particularly looking at the large swathes of let residences in the ownership of housing associations and local councils. Many local authorities, in particular, welcome help from outside in improving the condition and management of their residential holdings, and in return, are prepared to release surplus land, and sometimes even life expired buildings – as is being done in London’s Elephant and Castle with the Heygate Estate, a venture between London Borough of Southwark and developer Lend Lease. We may not like the idea of not owning our own homes – but at least they will be as well built and specified as anything we may buy.
PIGGING OUT: Entertainment One built its fortune on pigs, or really on one pig, Peppa Pig, the children’s TV favourite which it produces. The cash flow from that has enabled the group – now known as eOne – to become a major player in media and entertainment with a focus on investing in new productions and also a distributor of its own productions and those of others. Now it is going back to its roots in production, forming a joint venture with Brad Weston, the American film producer, to produce more original works – and in particular to retain the global copyrights which are now the main money-spinners in the global production business. Once a production is made (and is a success) then the rights can produce income for many years, both from repeat fees and merchandising, with minimal costs beyond collecting the license fees. Peppa is a case in point, continuing to be a children’s favourite in many countries – and with continuing market opportunities for spin-off souvenirs and toys (eOne does not produce these itself but licenses the rights, so collecting income streams at low cost and risk).
eOne is listed on the London Stock Exchange where its market value is around £1bn; an attempt last year from ITV to take it over at that price was rejected, the board believing that the net present value cash flow of those income rights considerably exceeded the stock market price. It acquired Peppa Pig from its original producers in 2007 when it listed on Aim, since moving to the main market and now being in the FTSE 250.
It sees the deal with Mr Weston as an opportunity to further grow the business and to diversify into other forms of film production where it thinks that playing films on individual devices (rather than going along to the local cinema) is going to be one of the fastest growing parts of the entertainment business.
MORE ON BRENT: Not Brent oil; Brent shopping. The Brent Cross Shopping Centre in North West London was the first purpose built shopping mall in the UK, opened forty years ago; it is still one of the most successful. Now joint owners Hammerson (a property company) and Standard Life, pension investor, have announced that they intend to spend £1.4bn doubling the size of the centre, to provide it with not just more shopping but also more leisure facilities (especially food outlets), over 6,000 flats, greatly expanded car parking, and an improved access by car and train – including a new garden bridge over the North Circular Road. This has been a long time in the planning – ten years and more – but a detailed planning application is on its way to Brent Council, and it is hoped to get approval soon and start work early next year.
YET MORE BRENT: Not Brent shopping, Brent oil. As the oil price does another reversal (see below) BP have made the timely announcement that they are about to reopen their Shetlands field, which has been closed for 4 years. This will cost about £4bn to modernise and reopen but recent testing suggests that the extractable reserves will double BP’s current North Sea production and extend the life of the field to at least 2035. Good for oil users, one presumes, and for perhaps for the Scottish National Party…
KEY MARKET INDICES: (as at 23rd May 2017; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.30% (fall); 5 year 0.67% (fall).
Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.10% (steady)
US$: 1 mth 1.02% (rise); 3 mth 1.19% (rise); 5 year 1.84% (fall)
Currency Exchanges:
£/Euro: 1.15, £ weakening
£/$: 1.29, £ steady
Euro/$: 1.12, € strengthening
Commodities:
Gold, oz: $1,252, modest rise
Aluminium, tonne: $1,925, rise
Copper, tonne: $5,660, modest rise
Iron Ore, tonne: $70.22, rising
Oil, Brent Crude barrel: $54.32 rising
Wheat, tonne: £144 falling
London Stock Exchange: FTSE 100: 7,501 (slight fall). FTSE Allshare: 4,106 slight fall)
Briefly:
Commodities continue to rise modestly, except for wheat, which had a sharp fall (reflecting expectations of this year’s harvest). Oil continued its recovery. The LSE seems to be marking time, as does sterling; US short interest rates rose, starting to put pressure on sterling.
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